Borthwick, Betaworks, and the Search for the Incubator Holy Grail

Since time immemorial (late 1990s), venture capitalists and entrepreneurs have sought the Holy Grail of start-up value creation: the perfect "incubator" model. This hypothetical wealth machine lies somewhere between "venture capital firm" and "operating company," combining the best attributes of each.

Why is this a Holy Grail?

Because the period of greatest value creation for most digital start-ups (on a return-on-invested capital basis) occurs between concept and prototype. Consumer web businesses are not capital intensive, which means that a good idea plus a small amount of money and smooth early execution can yield a fantastic return--even by the time the start-up reaches a Series A round. No surprise then, that many of the industry's best and brightest have sought to turn the concept-to-prototype process into a production line.

Alas, in practice, sustained incubator success has proved elusive. Why? Because it turns out that a few of the key elements that make start-ups and venture capital firms successful are really hard to combine in the same package.

Specifically, successful start-ups generally have:

Good idea

Money

Strong team

Obsessed visionary with everything to lose

Successful venture capital firms, meanwhile, have:

Steady flow of good ideas and obsessed visionaries with everything to lose

Money

Big Rolodex

Attractive entry prices.

Bear in mind that most VCs and start-ups fail. So the firms that can find all the necessary ingredients are rare, even when you're only trying to do either/or. When you try to combine the two in an incubator, moreover, you often find that there aren't enough of the key ingredients to go around.

Most incubators have lots of good ideas and money and they may even have strong executives waiting in the wings. But they often don't have enough obsessed visionary entrepreneurs--because obsessed visionary entrepreneurs don't usually want to be on someone else's payroll. (The ones the incubators do have, meanwhile, can only focus on one or two projects at a time.)

Most incubators also run into trouble with diversification: Unless they spread their talent far too thin, they usually can't get enough companies in the portfolio to offset the likelihood that the vast majority will fail.

In any event... New York Internet entrepreneur and executive John Borthwick (SA 100 No. 36) is taking another crack at the incubator model. So far, after some trial and error, he is indeed taking a different approach (not least by referring to the problem as a "hairball").

Asmall amount of money. This is unusual. Most incubators take as much cash as investors are willing to throw at them (in bull markets, a lot). The advantage of NOT doing this is you aren't beholding to a dozen screaming partners demanding that you immediately generate a nice ROI. (The disadvantage is that you'll be resource constrained and too concentrated.)

Centralized CORE services--engineering, IP, analytics, etc--instead of just centralized admin services like HR and finance. Hard to see how the best talent won't want to work on the projects that are really cranking, but certainly worth a try.

Will it work? Who knows? Certainly worth a try. So far, Betaworks has churned out fourteen seed investments and four products. So they're not suffering from analysis paralysis.

John also has one other advantage, which is that he's agonizingly aware of the legions of incubator Holy Grail seekers who have gone before (Think--to name just a few--Internet Capital Group, idealab, 12 Entrepreneuring, Safeguard Scientifics, etc.).

Central to the design of betaworks is the assumption that companies
building services with a common theme can and should profit from
inclusion in a platform or network of loosely coupled bits and driving
context and meaning across these sites is valuable. Portals are gone
but a new metaphor has yet to emerge to replace the portal concept. The
portal was grounded in the same set of assumptions as media has
operated with for many years — as it recedes something new is emerging.
Something that is more distributed — something that is not based on the
assumption that erecting a walled garden around services is the way to
build a sustainable long term relationship with users or a long term
business. Something that actually encourages the movement of data
across edge services, vs. building silos — as data moves and is
exchanged it actually gains in value becoming more interesting to users
not less. There is a hairball we are decoding, bit by bit, its right in
front of us our job is to figure it out and scale it.

Someone said to me last week that we are a reverse incubator.
Incubators share the peripheral services things that I believe
entrepreneurs can and should get from the market (legal, hr,
accounting, office space) — betaworks is designed to share core
capabilities - software / IP, knowledge, data, standards, analytics,
leadership, tools etc… Someone a year ago called it a funcubator —
maybe a reversobator, or outcubator?

Having looked at several dozen incubator plans over the years, we don't care much what it's called (though a product called the Reversobator might pique our curiosity). We do have one request, though: Make it work!